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The Advantages of Leasing

July 1, 2006
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A leasing firm discusses sophisticated business reasons why leasing beats purchasing by Daniel Cahill
BY DANIEL CAHILL The advantages of leasing
A healthcare leasing firm discusses why leasing compares favorably with purchasing equipment for long-term care
Today's rapid changes in the law and patient care standards often demand that facilities update and replace their equipment. For facilities, these changes frequently require creative financing. And as it turns out, leasing offers greater operational, strategic, and financial benefits than outright ownership. Leasing enables facilities to acquire up-to-date equipment while preserving cash and credit lines for more strategic business uses.

Among the benefits of leasing equipment are (1) conservation of capital, (2) payment flexibility, (3) residual value risk, (4) tax advantages, (5) operational flexibility, (6) upgrade flexibility, and (7) flexibility to act quickly to meet changing requirements. Addressing each benefit:

Conservation of capital. Unlike other methods of financing, leasing does not typically involve up-front commitment fees or require down payments or deposits. Additionally, many organizations are subject to regulatory requirements regarding the financial liquidity of a percentage of their asset base. In these cases, leasing allows a company's assets to be invested in fluid financial instruments rather than in hard assets, which are typically difficult to convert and are illiquid.

Leasing also enables a facility to manage assets by allowing it to keep its cash and still expand. This includes being able to roll tax and other soft costs, such as installation, into the lease. In short, leasing allows for a zero down payment for new equipment. Leasing a $20,000 system for $450 a month frees up $19,550 cash to be put toward other purchases, such as:

  • extra units;
  • renovating a second location;
  • adding an additional system, such as security, nurse call, audio, etc.; or
  • purchasing upgraded models.

Leasing is a natural choice for rapidly growing facilities. Inventory and receivables spike when a facility is adding new residents. It permits a facility to keep cash and control cash flow more effectively.

Payment flexibility. Lessors provide payment flexibility tailored to the user's specific cash flow or budgetary requirements. The payments may be made monthly, quarterly, semiannually, or annually, with payment dates either in advance or arrears. Lessors can also provide payment and term flexibility tailored to match either project or revenue-generation milestones. Additionally, unlike a flat depreciation schedule or typical purchase financing, a lease can provide stepped payments, which either increase or decrease at specific times. An example of this payment flexibility would be financing a project that had a significant start-up period before revenue generation.

Leasing has less effect on budgets than purchasing. Therefore, it provides companies with the opportunity to realize operational savings and productivity improvements in a more timely manner.

Residual value risk. Leasing provides a hedge against obsolescence, facilitates upgrading, and assists in the disposal of old equipment. Although there is a lot of new equipment that keeps facilities competitive and updated, the value of these assets over a three- to five-year period is unsure. Moreover, most equipment entails maintenance costs. Leasing equipment enables facilities to stay ahead of the curve and offer residents and patients the latest technology, while keeping the costs manageable.

Tax advantages. Some facilities are aware that leasing provides a no-money-down solution-but many are not aware that if structured properly, the total cost of the lease can actually be less than the equipment. For example, a piece of equipment that cost $20,000 ends up only costing the facility $17,534 because of the tax advantages associated with a lease payment. But beware: Many brokers are not aware (or do not inform) customers that this is only applicable to certain leases, particularly those with a 1% buyout clause. Strategic funding counsel from a reputable leasing company is essential.

In general, from an accounting standpoint, potential lessees should consider the benefit of leasing versus the tax benefit of equipment depreciation. Leasing allows a facility to update equipment regularly and stay ahead of trends and code requirements while preserving cash and credit lines. However, if a piece of equipment won't become obsolete within a reasonable time, purchasing it may be the best option. Remember, leased equipment is expensed as "rental expense"; the lease terms will often allow a more rapid recovery of the cost of the equipment if you decide to purchase.

Often, though, some equipment is deemed obsolete by the lessee at the end of the lease and returned for more current technology or products that require less maintenance and downtime. However, accelerated depreciation is permitted under certain circumstances; this is a point on which a professional accountant should be consulted.